Most gamers have fond memories of eagerly queuing up at a shop to buy the latest title, before cracking open the plastic case and gorging on the colourful instruction manual. But for future generations this could be an alien experience. After we recently investigated the growth in digital games distribution in Finland, Digital Spy turned the lens on the UK scene to ask whether the days of games retail are numbered.

Last year, the UK games industry saw a 7% year-on-year decline in the sales of physical software in 2011, and this slump is said to have deepened by a further 25% this year. Major retailer GAME saw a whopping 90% wiped off its share price last year after a string of troubles, and this week the firm announced plans to close 35 UK stores and shut down gameplay.co.uk. Over in the US, sales of packaged hardware, software and accessories have dropped 21% year-on-year.

But it is challenging for almost every retailer right now, so are video games shops just enduring a temporary blip? Well, a possibly more interesting trend is coming from within the people who actually make games. A recent report by games industry trade body Tiga showed that new developers are increasingly shunning retail and instead forging their own path on digital platforms.

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According to Tiga, 71% of games start-ups launched between 2008 and 2011 in Britain were focused exclusively on networked gaming over digital, mobile, online and social channels, while just 10% intended to work on both network and retail titles. Overall, 67% of the UK games development sector is working either exclusively or in part on network gaming.

A separate study of British studios revealed that the majority expect network gaming to grow by 21% per year up to 2015, while retail is expected to fall by over 3% per year during the same period. Dr Richard Wilson, Tiga's chief executive, said that the figures will make grim reading for retailers.

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"The people who make games are voting with their feet, and it's not just a walk, it's a stampede," he said. "A lot of start-ups are focusing entirely on digital distribution and networked gaming. There is only around 20% that are focused on retail, which really shows that the tide has turned quite dramatically in distribution."

But there are thousands of people working in the entire video games retail industry, so does Wilson not have sympathy for these ailing businesses?

"Oh, I think you would be pretty heartless not to have sympathy for any company in any kind of difficulty," he responded. "So I don't take any pleasure in traditional companies in trouble, it is just not in my nature. But I suppose that the truth of the matter is that the market is very competitive. It is always about change in the games industry, but never more so than now, so it places a premium on acting quickly and being innovative to capitalise on this new market as quick as you can."

The times are changing, but the death of retail is perhaps a touch premature when you look at some individual cases. A new edition in Activision's Call of Duty first-person shooter series can still generate $1bn in retail sales in only a matter of months, and most industries would kill for the sort of earnings potential enjoyed by so-called 'triple A' titles. But Wilson said that the industry has become "polarised", as Goliath blockbusters enjoy isolated retail success against the tide of digital.

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Patrick O'Luanaigh, the boss of UK developer nDreams and Tiga board member, feels that the continued success of triple A games such as Call of Duty is also symptomatic of a wider issue affecting the industry. Just to recap, the 'traditional' model of making games involved developers selling their idea to the publishers, getting funding and then earning royalties when the boxed product was eventually released.

In previous years, a variety of projects would get commissioned, from the 'triple As' to the more modest 'As'. But O'Luanaigh noted that the global recession has created a general unwillingness on publishers to take risks, meaning the market for anything below 'triple A' has "fallen away". Equally, a lot of major games, such as Grand Theft Auto and FIFA, are made in-house at publishers, either via design or acquisition, and so it has got "incredibly hard" for independent studios.

"The old model has never been a very good model anyway, to be honest with you," said O'Luanaigh. "Among developers there is a general feeling that you develop a great idea, the publisher will then take it from you, they will fund the project, promise you lots of royalties, but you rarely get lots of royalties.

"So a development studio will be left at the end of the project with 100 to 150 people, mouths to feed, all those salaries to pay, but they are left looking for a new project. It's a horrible, horrible model for anybody but the publishers. So now you have a double whammy of publishers not having much money to spend on new projects, and developers now actually able to do their own thing."

Possibly even more so than in the music and film industries, games developers have turned the grassroots into a bountiful rainforest. Rather than being bound to the whims of the publisher gatekeepers, the studios can come up with an IP, find some funding and then self-publish it on platforms such as iOS, Android, social networks, online, Xbox Live Arcade, the PlayStation Network, Steam…we could go on. The most crucial part is that the crippling cost of actually producing the boxed product and physically getting it to market is completely removed.

"More and more companies, such as Jagex and Double Fine, are finding funding, enabling them to control their own IP," said O'Luanaigh. "It's a much better model, and so it's not surprising that more studios are heading down that road. That route does not involve making boxed games for retail because it is incredibly expensive to do that, you have a huge stock risk, and all that. The truth is that so many games people are playing nowadays are on platforms where the retail model doesn't exist. It just seems that retail is fighting against the trend of what people are actually doing."

Releasing a game digitally is much quicker than the typical three-year retail development cycle, but the studios can also get instant feedback, run analytics and then improve their product. O'Luanaigh noted that the new fragmented market has also enabled more niche content to thrive, such as Paul Jackson's Railworks Train Simulator games.

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This shift in the market is further allowing companies that previously would have struggled to compete, becoming multi-million pound Goliaths. Zynga, the maker of popular Facebook games such as Farmville and Mafia Wars, floated on the US stock market last year, placing the company only behind Activision and EA in terms of stock valuation. The same success has been seen in various other countries, as independent developers throw off the shackles of the old model.

O'Luanaigh: "It is enormously exciting for an independent developer, because they can cut out, or diminish their dependence on the traditional publisher and build a direct relationship with the consumer. Then they have a bigger opportunity to get a bigger revenue share."

But this, of course, brings new challenges to the studios, as they must take on the job of negotiating with the platform holders for distribution. nDreams has been able foster a close relationship with Sony for prominence of its games on PlayStation Home, but not all studios are so well placed. Question marks, therefore, remain over whether the indie studios are merely swapping one set of gatekeepers for another. Are Apple and Google now dictating what games get are made, and where? O'Luanaigh does not think so.

"It's true for some platforms, but it's not true for every game," he said. "Take Jagex, they have done some amazing stuff with Runescape on browsers. They launched the game on a website, meaning there is no gatekeeper; it's just them and the community. Apple on iOS or Google on Android are different to publishers. As long as you hit the rules that Apple says, such as no pornography and so on, you can get in the App Store."

However, he added: "Whether Apple actually promote it and make it a featured game is another issue. That can be a huge concern for smaller studios who don't know the right people to talk to. But at the end of the day, you can get your game out there and in front of people. In the old days of retail, there was literally no way you could do that without going to a publisher. It would have to be a big game with a budget of say, £3 or £4m. Now you can launch something for £15 or £20,000, and then adapt it."

While the retailers continue to struggle, there are strong signs that the big publishers have seen the warning signs long ago. Both EA and Activision now have digital revenues of upwards of $1bn annually. Ubisoft recently completed the acquisition of RedLynx, the Helsinki-based studio behind the popular Trials franchise on XBLA. RedLynx is perhaps the epitome of the new generation of digital developers, as over its 12-year history the studio developed 100 games without one seeing the inside of a shop.

RedLynx was picked by Nokia from 50 aspiring mobile developers to create a game for the ill-fated Nokia N-Gage handheld/mobile hybrid. Undeterred by the N-Gage's failure, RedLynx continued to plough an exclusively digital furrow, eventually getting its big break with the self-published Trials 2 on PC, which sold 200,000 copies and, as the firm's chief executive Tevo Virtala says, "proved the opportunity". After follow-up Trials HD sold more than 2m copies on XBLA, RedLynx will soon unleash Trials Evolution, which Virtala says will set a "completely new benchmark for any digitally distributed game".

Ubisoft has made an astute purchase in Red Lynx, but not all publishers are coping so well. The struggles over at THQ have been well documented, which O'Luanaigh feels is because the company retrenched away from new media to the 'safe haven' of triple A boxed products, despite that market showing clear signs of "declining". So, with all that we have discussed, are we seeing the slow death of video games retail as we know it?

"My instinct is no," replied O'Luanaigh. "There is always going to be a market for amazing games, and a large audience too. You are just seeing a fragmentation in that there are lots of different games available. For me personally, I think that there will be a fewer number of 'triple A' games, and the majority of games will be accessed via downloads. So you will have your big games, the Call of Dutys and so on, and then a whole host of games that appeal to people in niches and so on. It's a really exciting time for studios, as we can control the process. Some publishers are great, some are not so great, and they can change their mind half way through projects; so it's lovely being in control of our own destiny."

We asked GAME for comment, but had not got a response at the time of publication.

What do you think about the current state of games retail? Add a comment to the space below.